The Internal Revenue Service permits employers to offer tax-advantaged employee benefits relative to healthcare reimbursement, transportation (transit and parking) and dependent care expenses.
Employers may provide employees with dollars for these purposes or permit payroll deductions, up to the limits defined by the IRS. In both cases, the employer is eligible for savings on FICA taxes on these amounts. To be in compliance with IRS requirements, the employer must adopt a program to ensure that these dollars are spent only for the qualified category of goods or services for the particular benefit area. There are several types of such employee benefits accounts, including flexible spending accounts, healthcare reimbursement arrangements and health savings accounts. For convenience of reference, these types of accounts are referred to herein as “flexible spending accounts”.
A typical way of documenting and substantiating that the funds are properly spent is to have the employee submit receipts that document the goods or services for reimbursement. However, under this approach, the employee must pay out of their own funds, then, wait to get reimbursed. Additionally, this approach involves considerable manual staff support to receive and review the receipt documentation, then cut checks or arrange for a funds transfer into the employee's checking account.
Recently, payment cards have been added as a means of permitting employees to use a debit, credit or prepaid (“payment”) card to directly access the funds account. While this increases the convenience for the employee, it may create instances in which the employee has to be asked to send a copy of the receipt to document that the goods or services purchased with the payment card were, in fact, qualified items for the type of benefit account. To help reduce the administrative expense associated with getting this follow-up receipt documentation, some card issuers place restrictions on the locations where the payment cards can be used. As a result of the account/funds usage restrictions, the card issuer declines transactions at locations that are not clearly identifiable as the qualified type, even though the goods or services being purchased may be qualified products/services. This results in an inconvenience for the cardholder and incurs the cost of manual receipt documentation and funds reimbursement.